Fed's Schmid wants cautious, gradual, deliberate rate cuts

Oct 21 (Reuters) - Kansas City Federal Reserve Bank President Jeffrey Schmid said on Monday he supports a "cautious and deliberate" approach to interest rate cuts now that inflation is heading back to the Fed's 2% target and the labor market is normalizing.

"While I support dialing back the restrictiveness of policy, my preference would be to avoid outsized moves, especially given uncertainty over the eventual destination of policy and my desire to avoid contributing to financial market volatility," Schmid said in remarks prepared for delivery to the Certified Financial Analysts Society of Kansas City, in Missouri.

"Lowering rates in a gradual fashion would provide time to observe the economy's reaction to our interest rate adjustments and give us the space to assess at what level interest rates are neither restricting nor boosting the economy."

The Fed last month cut the policy rate by a bigger-than-expected half of a percentage point, and signaled that most Fed policymakers expect that further, likely smaller, interest-rate reductions will be appropriate.

In his prepared remarks on Monday, Schmid did not lay out exactly how fast or how far he thinks the Fed should cut rates, but his remarks show he is among those who feel the central bank need not be too aggressive about it.

The economy, he said, likely grew at a 3% pace last quarter, supported by strong consumer spending and a labor market that is cooling but not deteriorating. In view of that strength, he said, "it seems unlikely that monetary policy is all that restrictive."

Indeed, the level at which interest rates are likely to settle is probably "well above" what it was during the decade before the pandemic, he noted.

Big Fed interest rate cuts, he said, could feed into the idea that the U.S. central bank will continue to cut rates rapidly, raising the risk of heightened financial market volatility, he said.

"My belief is that a cautious and gradual approach to policy adjustments would be best suited for this uncertain environment," Schmid said. (Reporting by Ann Saphir; Editing by Richard Chang)